In April the fund performed well both in absolute terms and relative to its benchmark. During the month, TB Wise Multi-Asset Income made a total return of 3.6%. The fund’s benchmark, the Cboe UK All-Companies index was up 2.6%, and the average fund in the IA Flexible sector rose 2.9%.
In the calendar year to date, the fund has made a total return of +11.93%, while the Cboe UK All-Companies index has returned 12.41%, and the IA Flexible sector average has made 9.40%. We are pleased to report that fund has captured around 97% of the gains in a strongly-rising UK stock market, despite holding diversifying assets such as commercial property, infrastructure and cash.
Analysts have offered a number of explanations for the recent market strength. Of these, the most credible appears to be the non-appearance of inflationary pressures, and consequent lack of pressure to raise interest rates. At the end of a normal economic cycle, in other words the kind of cycle that used to exist before the Financial Crisis of 2007, accelerating activity would create shortages, causing prices to rise. Central banks would attempt to choke off inflation by raising interest rates, which makes borrowing more expensive, ‘sucks money out of the economy’ and tends to dampen economic activity. Higher rates on cash also make deposit accounts more attractive relative to bonds, whose interest payments are fixed, and shares. With interest rates at their current rock-bottom levels, a series of interest-rate hikes would present a serious challenge to valuations in the financial markets. The language used by the Federal Reserve, the body which fixes US interest rates, towards the end of 2018, suggested that just such a series of rate-hikes was envisaged, causing the mayhem in financial markets which occurred at the end of the year.
In most years, a return of 12%, which the fund has made in the first four months, would be seen as perfectly acceptable, and the pertinent question must be whether the assets in the fund have re-rated to their fair value, and whether perhaps 2019 might be a year where it would be prudent to sell in May, and go away. An analysis of the holdings in the fund would suggest that now would not be a good time to sell these assets. There is a difference between ‘expensive’ and ‘not at the extremely depressed levels we saw a few months ago’. One way to look at a fund’s valuation is to ask where the fund’s price would be if each of its holdings returned to its highest price of the last year. If all the holdings were already at their highest prices of the last year, the answer would be +0%. In the case of TB Wise Multi-Asset Income, the answer is slightly below +25%. There is plenty of value left in the fund at current levels.
A couple of the fund’s holdings are looking fully valued. The Renewables Infrastructure Group, known as TRIG, an investment trust, is priced at a premium of 9% to its asset value, which appears anomalous when the Ecofin Global Utilities and Infrastructure Trust (EGL) stands at a discount of more than 10%. We have reduced the TRIG position to below 1% of the fund. Shares in the fund manager Ashmore have rallied 36% from their lows, propelled by a combination of rising asset prices in emerging markets and net inflows into their funds. Despite the re-rating, the shares do not look expensive just yet. Ashmore is well placed to benefit from a return of emerging markets to favour among institutional investors, who have been avoiding the area for most of the last decade. Apart from these two holdings, worth around 2% of the fund together, the assets in TB Wise Multi-Asset Income continue to look cheap.
During the month the fund took a new position in the fund manager Polar Capital, which had been sold in mid-2018 after exceeding our price target. We added to the new positions in European Assets and XP Power, as well as to BT, HSBC, Legal & General, Lookers, Palace Capital and Pennon. The fund top-sliced the holding in Ashmore and exited Braemar Shipping, which had continued to disappoint.
The fund’s dividend yield was 5.4% at the end of April. The next quarterly ex-dividend date is the end of May. This quarter’s dividend, which will be paid at the end of July, is traditionally the largest of the four.